I sold my Trust to our LAQC, do we pay tax?

Question from Mel Brown updated on 9th June 2009:

My family trust (set up by myself) has recently sold it's long-term investment property into an LAQC (owned by myself & my husband) so we can take advantage of the tax benefits. Is the profit on the sale part taxable (depreciation recovered) & part non-taxable (capital gains) or all non-taxable capital gains? Also, do I include the capital gain in my trust return or only any taxable income?

Our expert Mark Withers responded:

Assuming your trust is not a developer, builder or trader in land ( or associated with one) and it did not acquire the property with an intention to sell it the capital gain on the property should not be assessable for income tax. Having said that, the fact that you have made a capital gain will generally mean that the building is being sold in excess of cost price which will trigger a full recovery of all accumulated depreciation.

I assume from the fact that you have decided to move the property to the LAQC that there are accumulated tax losses in the trust that you have been unable to utilise. If this is the case the income from the depreciation recovery should be able to offset the accumulated losses. This may well mean that the trust has no actual tax payable despite accounting for the recovery of depreciation.

The capital profit on sale should be accounted for in your trusts capital account as this money will belong to the trust unless a distribution is made to a beneficiary. The need to track this trust capital balance is a timely reminder of the requirements to do full financial statements for a trust rather than just filing a simple revenue statement with the tax department.

Note also that because the LAQC is likely to be associated with the trust, depreciation claimable by the LAQC must be based on the original cost to the trust rather than the companies new cost price. This means you will need to calculate a non depreciatble portion of asset cost in the companies depreciation schedule. This restriction is designed to remove any incentive to transfer assets between associated parties to increase depreciation deductions.
Kind Regards Mark Withers

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.



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